Green shoots encourage fresh financial thinking

Five years since the start of the financial crisis, investors still tend to be
risk-averse although signs of confidence are emerging. This new series
focuses on current trends in investment planning and strategy with an
in-depth look at recent BlackRock research

By Andrew Davis

5:00PM GMT 01 Nov 2013

The past few years have been unusually challenging for many savers and investors in this country – many people are having to make their household budget stretch further and are finding it hard to earn a decent rate of interest on their savings. What steps can people take to feel more confident about their financial situation and to plan for their future?

To address these questions, asset manager BlackRock carried out a survey among British savers and investors across the income spectrum in September. The results make striking reading.

In a series of articles over the coming weeks we will look at what the research reveals about the state of the British investor, including case studies to examine how people are managing their finances and commentary from financial advisers and BlackRock experts. As well as the series of newspaper articles, there will be lots of coverage online. But this article offers a pen portrait of a nation juggling today’s demands with the need to think long term.

Overall, the research shows a split between those who feel in control of their financial future and those who don’t. Among the latter, reasons fall into three main areas: the cost of living combined with the need to reduce existing debts, widespread belief that achieving the living standards that they aspire to in retirement is growing more difficult and a lack of knowledge of how to tackle the financial challenges they face. Some 42pc said they were interested in knowing more about investments and savings, while almost 30pc said that the most important factor for them in deciding on an investment was the ease of understanding the product.

When asked what their savings and investments consist of, Britons’ overwhelming answer is cash in the bank – some 68pc of all UK savings and investment assets are held in cash, more than five times the proportion that is invested in the equity markets. The strong preference for cash savings shows up right across the board – even among those with six-figure salaries and/or investment pots, who are generally more inclined to invest in the stock market, cash represents 42pc of their assets.

This liking for cash is doubtless partly explained by our desire to have access to money. But it also reflects our reluctance to take risks: 57pc of Britons are not willing to take any financial risks at all and even among those with the highest incomes, more than 40pc said that banking money was the best way to avoid investment losses.

This is striking during a period when interest rates on cash savings are mostly well below the rate of inflation, meaning that it will steadily lose purchasing power as it fails to grow at the same pace as retail prices. However, when asked what their top investment priority was, only one in 10 chose protecting themself from the effects of inflation.

Building up cash while in many ways may seem safe, it leaves people with all their eggs in one basket, and exposed to the risks of the erosive effects of inflation over the long term. Just 19pc of people describe themselves as actively investing, while 12pc say they are ready to invest but lack the knowledge.

That compares with 63pc who say they are not investing in the markets at all.

Although many are concerned about making the right moves to meet their long-term goals, many pointed to much more short-term issues that dominated their thinking – almost half cited the state of the UK economy as the major threat to their financial wellbeing and a third reported that they were concerned about “having to spend more than I earn”. This was particularly the case for people from their mid-30s to their mid-50s, who spend half their income on average on utility bills, housing costs and debt payments.

Potential increases in interest rates was a major concern for a sizeable minority, suggesting that anxiety over higher mortgage outgoings trumps their desire to see a greater return on their cash savings. Perhaps it’s unsurprising that when asked how they would use any additional income, just over a quarter of respondents said they would pay off their debts.

So the pressure of the present is dominating many people’s thinking at the expense of longer-term planning – even though many say securing their wellbeing in old age is a key priority. However, the research also showed clearly that taking a variety of simple steps can help people to feel more in control of their finances and better prepared for the future.

For example, people who take financial planning seriously feel significantly more confident about their future and more in control of their finances. The research also showed that those who report that they feel in control of their financial future spend a smaller percentage of their monthly income on bills and debts than the population overall. In turn, more of their income is free to be saved or invested – which reinforces their sense of being in control.

So the evidence suggests that one of the most important things people can do to create this virtuous circle of confidence and control is to think about their own long-term financial plan and start taking small but steady steps to put it into effect. This might, for example, involve working out how large a sum they need to save as a “rainy day fund” and then thinking about how they might invest anything beyond that to meet their longer-term goals such as a retirement fund.

Part of the nature of investing is that giving your money as long as possible to grow is vital – so it’s better to start the planning process sooner rather than later.

The survey also shows that people who have taken advice are more confident that they will manage to have the income they believe they will need to live comfortably in retirement. It would appear that taking advice has given them more confidence in terms of achieving the lifestyle they hope for.

The picture that emerges from this research overall suggests that many British savers and investors are firmly focused on the immediate future and many of them feel they lack the knowledge and confidence to prepare for the long term. Among those that have started to make plans, however, the benefits are clear.

Over the next few weeks this series will ask whether people should do more to diversify their savings and investments, what steps people can take to ensure they enjoy the retirement they aspire to, and how better financial planning can help people to feel more in control of their own destiny.